Low oil prices in Canada

The dive in oil prices is seen as an unprecedented development for the Canadian economy, as pointed out by one of the leading banks in Canada. Oil prices in Canada have lost their value in a span of nine months. It is estimated that cheaper oil could cost the Canadian government up to 13 billion USD.Government revenue has reduced rapidly given that the government owns the oil companies in Canada.Economist has warned Canadian government that the worst is yet to come due to the low oil price, hence the government has taken several measures to ensure that it survives this economic tragedy.

 

Canadas bank was the first central bank of the seven to cut interest rates. This was in response to the falling oil prices. Commercial banks experienced a cut on overnight loans by a quarter point to 0.75%. This reduction in the interest rates was a move aimed at trying to provide insurance against the risk posed on the inflation profile as well as the financial stability.

Canada is the largest oil exporter to the United States and as a reaction to the plummeting oil prices loosened its monetary policy; there’s a risk of deflation globally. This saw the country’s currency depreciate several cents against its U.S. counterpart. This as an attempt meant to increase the exchange rates of the country and their goods become more competitive in the global market

The government has also sought to increase cooperate tax.This is an amount based on net income of companies, which they make as they exercise their business activity. These revenues are a significant revenue source to the government, and so the government saw it reasonable for them to increase this taxes to be able to overcome the losses brought about by low oil price.

A new carbon policy is also a way in which the government has found wise to respond to the low oil prices. This policy will see to it that emission of carbon is taxed.” our goal is to become one of the world’s most progressive and forward-looking energy producers,”Notley.This strategy will see to it that companies pay for emitting carbon.It is estimated that the carbon tax will amount to$ 470 assuming that consumption of fossil fuel will remain the same os that of 2015.Companies are expected to raise $ 3 billion a year to pay for the carbon tax.

The government also have plans only to spend when it is necessary. And avoid creating debts. The government is currently urging that it is better to avoid adding the amount of economic problems they have by not borrowing from other nations and instead spend what they have .This step will also attract investors since measuring a countries ability to pay their debts.by not getting involved in debts. That they cannot pay at due to the current state of their economy, it is better to survive with what they have before they create new policies that will help deal with the decline in the economy.

Disadvantages.

Devaluing the Canadian currency could easily stoke inflation in the country (Tervala, 2013)

.This is because more money is injected into the economy, this, in turn, makes life expensive for importers, consumers as well as Canadians travelling to the United States, this is because the trips were bound to become more expensive, especially for those who had not planned ahead. Imports, the price of any imported good or raw material increases as a result of devaluing the currency. It curtailed cross-border shopping down by at least seven percent in 2012 as well as majorly aggravating the run-up in consumer prices, especially for food and fuel. The higher consumer prices help dampen household spending and especially on services.

The rate of unemployment rose as the employment growth rate slowed a bit, mostly because employers choose to hire very few people in a bid to adjust ,so as to survive and adapt to the devalued currency and the reality of a higher dollar. It is estimated that by the end of this year , there will be 10000 job losses in Canada .

Devaluing the Canadian currency may scare off investors. The investors are less willing to hold governments debts. Because the government is also reducing the value of their holdings, The investors lose trust in the currency .Investors will prefer to invest in a country that has a more stable currency and a place where they can get a value of their money and make more profits than losses.

Another adverse effect of devaluing a currency is that the people cut the amount they are saving which negatively impacts on the capital formation. And since the people are not sure about the value of their money because of their variable value, they start consuming more and getting rid of the money they had stored. The people will feel cheated by the government they have choosen, and they may not be willing even to vote or to create capital in the Canada

 

Reference

Impact of low oil & gas prices on bio-based materials & chemicals. (2015). Focus On Catalysts, 2015(10), 3. http://dx.doi.org/10.1016/j.focat.2015.09.007

Le Page, M. (2016). Low oil prices are bad news for climate change. New Scientist, 229(3056), 10. http://dx.doi.org/10.1016/s0262-4079(16)30107-5

Mahdi Barakchian, S. (2013). Forecasting the Effects of a Canada-US Currency Union on Output and Prices: A Counterfactual Analysis. Journal Of Forecasting, 32(7), 639-653. http://dx.doi.org/10.1002/for.2259

Tervala, J. (2013). Learning by devaluating: A supply-side effect of competitive devaluation. International Review Of Economics & Finance, 27, 275-290. http://dx.doi.org/10.1016/j.iref.2012.10.007